By Richard T. Karcher, J.D., Associate Professor in the Sport Management Program at Eastern Michigan University
Imagine yourself in the following situation. While pursuing your bachelor’s degree, you decided you want to be a lawyer and you did everything necessary to put yourself in a position to make that dream a reality – you finished your undergrad, took the LSAT, got accepted to law school, worked as an intern while in school, obtained your law degree, and ultimately got hired by a law firm. As an associate lawyer, you eagerly work long hours for your employer and do everything they ask of you. Then one day, a partner of the firm comes to your office and tells you the firm received notice that you violated Model Rule of Professional Conduct 7.3 for allegedly solicitating clients at a party. The law firm parts ways with you and the bar association – of which most law firms are members – issues a “show cause order” that, for a seven-year period, requires any law firm that seeks to hire you to demonstrate to the satisfaction of the association’s Committee on Discipline why it should not be subject to a penalty for hiring you because you were found by the Committee on Discipline as having been involved in a violation of the Model Rules of Professional Conduct.
Back to reality. Fortunately, neither your state bar association nor the American Bar Association permits such orders. But the NCAA does. Article 19.02.3 of the NCAA Division I Manual defines a show cause order as “an order that requires a member institution to demonstrate to the satisfaction of the Committee on Infractions [COI] or Independent Resolution Panel why it should not be subject to a penalty or additional penalty for not taking appropriate disciplinary or corrective action with regard to an institutional staff member or representative of the institution’s athletics interests found by the Committee on Infractions or Independent Resolution Panel as having been involved in a violation of the NCAA constitution and bylaws.”
It’s anyone’s guess exactly how a member institution demonstrates to the satisfaction of the COI why it should not be penalized for hiring a former staff member under a show-cause order, because, well, no institution does it. The institution would also be burdened with demonstrating to the COI how it would monitor the newly hired staff member. And if all that isn’t sufficient enough to prevent the institution from hiring the staff member, it would also be subject to harsher penalties if the hired person is found to violate NCAA rules while working at that institution. The practical effect of a show-cause order is the prohibition of future employment in the same industry during the period of the order, which is why it is often called the “Scarlet Letter” or “Kiss of Death.”
Call it what you want, Article 19.02.3 with an accompanying order effectively operates as an employee non-compete clause. The duration is anywhere from one year to a lifetime, the geographical area is nationwide, and the line of business is NCAA intercollegiate athletics. But even more restrictive than the typical non-compete clause in an employment agreement that can be enforced by the employer against the employee, Article 19.02.3 and an accompanying order is an agreement among competing firms within an entire industry to avoid hiring a specific person. But for what purpose? The purpose of an employee non-compete clause in an employment contract is so that an employer can deter or prevent an employee from voluntarily leaving for a competing firm and using what the employee learned, developed or obtained while working for the employer. Thus, if the purpose of the show-cause order is to deter or prevent a terminated staff member from working for a competing member institution, that can just as easily be achieved with a non-compete clause in the staff member’s employment contract.
So back to the question, what purpose is actually being served by a show-cause order? Is it to punish former staff members who violate NCAA bylaws? Is it to deter current staff members from committing violations? Perhaps it’s a combination of both, but one thing is for certain. The practical effect of a show-cause order is a group boycott, or refusal to deal, that prevents all NCAA member institutions from competing with each other to hire a member institution’s terminated staff member.
This clear anticompetitive effect raises questions concerning the legality of show-cause orders under state and federal laws. Regarding state law, show-cause orders should be treated like other employee non-compete agreements that are regulated by all states. For example, a statute in Michigan (my home state), known as the Antitrust Reform Act, provides in pertinent part: “An employer may obtain from an employee an agreement or covenant which protects an employer’s reasonable competitive business interests and expressly prohibits an employee from engaging in employment or a line of business after termination of employment if the agreement or covenant is reasonable as to its duration, geographical area, and the type of employment or line of business.”[1] A judge in California recently ruled that a one-year show-cause order imposed on a former University of Southern California assistant football coach constituted an “unlawful restraint” on the former coach pursuing a lawful profession in violation of California law.[2] According to the judge, the former coach’s “ability to practice his profession as a college football coach has been restricted, if not preempted, not only in Los Angeles, but in every state in the country” and that his decision would “allow NCAA and member schools to conform their conduct to the law and prevent future litigation.”
In the California case, the NCAA filed a declaration from Pac-12 Commissioner Larry Scott stating: “If California law prevents institutions in that state from honoring such commitments, it is hard to see how the Pac-12’s Member Universities in California could continue to meet the requirements of NCAA membership” and “would place at risk the competitive and scholarship opportunities that flow from NCAA participation for the Pac-12 California Member Universities.” The NCAA also filed a declaration from Big West Commissioner Dennis Farrell expressing concern that conference schools could no longer rely on the NCAA’s disciplinary mechanisms if the show-cause penalty was illegal. These declarations reflect the “parade of horribles” scenario oft-repeated by universities, conferences, and the NCAA when the legality of NCAA rules or eligibility decisions are being challenged in court. The judge rightfully dismissed these stated concerns, saying they were speculative and irrelevant to the issue.
In regards to federal law, Section 1 of the Sherman Antitrust Act states that “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States … is declared to be illegal.”[3] To prevail on a Section 1 claim, a plaintiff would need to prove that the NCAA (1) participated in an agreement that (2) unreasonably restrained trade in the relevant market.[4] There is no dispute that an NCAA bylaw and its enforcement establishes an agreement for Section 1 purposes. There is also no dispute that a show-cause order is a restraint of trade on the labor market for coaches and others working in NCAA intercollegiate athletics. The pertinent question is whether it unreasonably restrains trade.
Surprisingly, there is a paucity of case precedent involving antitrust challenges to NCAA bylaws and enforcement actions by coaches and other institutional staff members. Hennessey v. NCAA involved an antitrust challenge to an NCAA bylaw passed in 1975 that limited the number of full-time assistant football and basketball coaches who could be employed by a member institution.[5] Law v. NCAA is the oft-referenced case that resulted in a successful antitrust challenge to an NCAA bylaw that set a salary cap for entry level coaches which had the function of limiting the number of coaches a Division I program could hire and forced the school to designate one of those coaches as a “restricted earnings coach,” who could not be paid in excess of $12,000 during the academic year and $4,000 during summer months.[6]
Although the bylaw in Law operated as a form of price fixing, in at least two respects the case is helpful for analyzing a show-cause order that operates as a group boycott or refusal to deal. First, to the extent it is claimed that show-cause orders only restrict employment with NCAA member institutions, the Law court rejected the NCAA’s argument that there was no anticompetitive effect on the market for coaching services because restricted earnings coaches could find coaching jobs in NCAA Division II, high school, and non-NCAA college teams.[7] Second, the court of appeals rejected the NCAA’s attempt to counter this clear anticompetitive effect by providing procompetitive justifications for the rule similar to those presented in Hennessey – that the rule “maintain[ed] competitive equity,” “retain[ed] entry-level coaching positions,” and protected NCAA member institutions from destructive cost increases. According to the Law court, the Hennessey court placed too much emphasis on the good intentions of the NCAA without requiring it to present concrete evidence showing how the bylaw actually helped to achieve those proffered objectives.[8]
The procompetitive justifications for show-cause orders are not at all clear. In Bassett v. NCAA,[9] the court of appeals did not require the NCAA to proffer any procompetitive justifications in response to a claim that a show-cause order violated Section 1. Instead, the court accepted the NCAA’s assertions that (1) the show-cause order was the result of the plaintiff’s own admitted misconduct and not a conspiracy to prevent him from coaching, (2) show-cause orders and sanctioning conduct do not constitute commercial activity because the rules enforced by the NCAA, in fact, punish the attempted commercialization of college athletes and intercollegiate athletics, and (3) show-cause orders do not produce anticompetitive effects on a discernible market. The court concluded that the plaintiff failed to allege that the employment ban resulted from some anticompetitive purpose, but rather the complaint alleged that the plaintiff’s injury, i.e. the ban, was the result of NCAA rules violations. Indeed, Bassett’s precedential weight is questionable. The case doesn’t even mention Law or Hennessey and it has since received negative treatment on the basis that amateurism rules are, in fact, commercial in nature.
In conclusion, the law should treat the show-cause order like an employment non-compete agreed upon by competing firms within an entire industry. Looking at the duration, geographical area, and line of business of show-cause orders, courts are likely to conclude that they violate state law governing employee non-compete agreements. And in the next federal antitrust lawsuit, the court is not likely to place too much emphasis on the good intentions of the NCAA without requiring it to present concrete evidence showing how the show-cause order actually helps to achieve the NCAA’s proffered procompetitive objectives.
[1] Mich. Comp. Laws Ann. § 445.774a (West).
[2] California’s Business and Professions Code provides that any contract which restrains one from engaging in a lawful profession is void. https://www.latimes.com/sports/sportsnow/la-sp-todd-mcnair-show-cause-20181009-story.html.
[3] Sherman Antitrust Act, 15 U.S.C. § 1 (2004).
[4] See Law v. Nat’l Collegiate Athletic Ass’n, 134 F.3d 1010, 1016 (10th Cir. 1998).
[5] Hennessey v. Nat’l Collegiate Athletic Ass’n, 564 F.2d 1136, 1148 (5th Cir. 1977).
[6] Citing a need to stop a “catastrophic cost spiral” in which NCAA member schools continued to increase spending on recruiting and coaches to compete with other schools, the NCAA formed a Cost Reduction Committee in 1989 which developed the “Restricted Earnings Coach Rule.”
[7] Law, 134 F.3d at 1020. The court reasoned that despite Division I coaching positions making up only a small portion of the overall coaching market, the NCAA’s lack of market power did not eliminate clear anticompetitive effects on the market for coaching services. Id.
[8] Because the NCAA failed to meet its burden of demonstrating legitimate procompetitive objectives, the Law court ruled in favor of the coaches on their antitrust claim, without inquiry into whether there were less restrictive means of achieving those objectives.
[9] Bassett v. Nat’l Collegiate Athletic Ass’n, 528 F.3d 426 (6th Cir. 2008).
The NCAA Show-Cause Order: A Conspiratorial Employee Non-Compete Agreement
By Richard T. Karcher, J.D., Associate Professor in the Sport Management Program at Eastern Michigan University
Imagine yourself in the following situation. While pursuing your bachelor’s degree, you decided you want to be a lawyer and you did everything necessary to put yourself in a position to make that dream a reality – you finished your undergrad, took the LSAT, got accepted to law school, worked as an intern while in school, obtained your law degree, and ultimately got hired by a law firm. As an associate lawyer, you eagerly work long hours for your employer and do everything they ask of you. Then one day, a partner of the firm comes to your office and tells you the firm received notice that you violated Model Rule of Professional Conduct 7.3 for allegedly solicitating clients at a party. The law firm parts ways with you and the bar association – of which most law firms are members – issues a “show cause order” that, for a seven-year period, requires any law firm that seeks to hire you to demonstrate to the satisfaction of the association’s Committee on Discipline why it should not be subject to a penalty for hiring you because you were found by the Committee on Discipline as having been involved in a violation of the Model Rules of Professional Conduct.
Back to reality. Fortunately, neither your state bar association nor the American Bar Association permits such orders. But the NCAA does. Article 19.02.3 of the NCAA Division I Manual defines a show cause order as “an order that requires a member institution to demonstrate to the satisfaction of the Committee on Infractions [COI] or Independent Resolution Panel why it should not be subject to a penalty or additional penalty for not taking appropriate disciplinary or corrective action with regard to an institutional staff member or representative of the institution’s athletics interests found by the Committee on Infractions or Independent Resolution Panel as having been involved in a violation of the NCAA constitution and bylaws.”
It’s anyone’s guess exactly how a member institution demonstrates to the satisfaction of the COI why it should not be penalized for hiring a former staff member under a show-cause order, because, well, no institution does it. The institution would also be burdened with demonstrating to the COI how it would monitor the newly hired staff member. And if all that isn’t sufficient enough to prevent the institution from hiring the staff member, it would also be subject to harsher penalties if the hired person is found to violate NCAA rules while working at that institution. The practical effect of a show-cause order is the prohibition of future employment in the same industry during the period of the order, which is why it is often called the “Scarlet Letter” or “Kiss of Death.”
Call it what you want, Article 19.02.3 with an accompanying order effectively operates as an employee non-compete clause. The duration is anywhere from one year to a lifetime, the geographical area is nationwide, and the line of business is NCAA intercollegiate athletics. But even more restrictive than the typical non-compete clause in an employment agreement that can be enforced by the employer against the employee, Article 19.02.3 and an accompanying order is an agreement among competing firms within an entire industry to avoid hiring a specific person. But for what purpose? The purpose of an employee non-compete clause in an employment contract is so that an employer can deter or prevent an employee from voluntarily leaving for a competing firm and using what the employee learned, developed or obtained while working for the employer. Thus, if the purpose of the show-cause order is to deter or prevent a terminated staff member from working for a competing member institution, that can just as easily be achieved with a non-compete clause in the staff member’s employment contract.
So back to the question, what purpose is actually being served by a show-cause order? Is it to punish former staff members who violate NCAA bylaws? Is it to deter current staff members from committing violations? Perhaps it’s a combination of both, but one thing is for certain. The practical effect of a show-cause order is a group boycott, or refusal to deal, that prevents all NCAA member institutions from competing with each other to hire a member institution’s terminated staff member.
This clear anticompetitive effect raises questions concerning the legality of show-cause orders under state and federal laws. Regarding state law, show-cause orders should be treated like other employee non-compete agreements that are regulated by all states. For example, a statute in Michigan (my home state), known as the Antitrust Reform Act, provides in pertinent part: “An employer may obtain from an employee an agreement or covenant which protects an employer’s reasonable competitive business interests and expressly prohibits an employee from engaging in employment or a line of business after termination of employment if the agreement or covenant is reasonable as to its duration, geographical area, and the type of employment or line of business.”[1] A judge in California recently ruled that a one-year show-cause order imposed on a former University of Southern California assistant football coach constituted an “unlawful restraint” on the former coach pursuing a lawful profession in violation of California law.[2] According to the judge, the former coach’s “ability to practice his profession as a college football coach has been restricted, if not preempted, not only in Los Angeles, but in every state in the country” and that his decision would “allow NCAA and member schools to conform their conduct to the law and prevent future litigation.”
In the California case, the NCAA filed a declaration from Pac-12 Commissioner Larry Scott stating: “If California law prevents institutions in that state from honoring such commitments, it is hard to see how the Pac-12’s Member Universities in California could continue to meet the requirements of NCAA membership” and “would place at risk the competitive and scholarship opportunities that flow from NCAA participation for the Pac-12 California Member Universities.” The NCAA also filed a declaration from Big West Commissioner Dennis Farrell expressing concern that conference schools could no longer rely on the NCAA’s disciplinary mechanisms if the show-cause penalty was illegal. These declarations reflect the “parade of horribles” scenario oft-repeated by universities, conferences, and the NCAA when the legality of NCAA rules or eligibility decisions are being challenged in court. The judge rightfully dismissed these stated concerns, saying they were speculative and irrelevant to the issue.
In regards to federal law, Section 1 of the Sherman Antitrust Act states that “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States … is declared to be illegal.”[3] To prevail on a Section 1 claim, a plaintiff would need to prove that the NCAA (1) participated in an agreement that (2) unreasonably restrained trade in the relevant market.[4] There is no dispute that an NCAA bylaw and its enforcement establishes an agreement for Section 1 purposes. There is also no dispute that a show-cause order is a restraint of trade on the labor market for coaches and others working in NCAA intercollegiate athletics. The pertinent question is whether it unreasonably restrains trade.
Surprisingly, there is a paucity of case precedent involving antitrust challenges to NCAA bylaws and enforcement actions by coaches and other institutional staff members. Hennessey v. NCAA involved an antitrust challenge to an NCAA bylaw passed in 1975 that limited the number of full-time assistant football and basketball coaches who could be employed by a member institution.[5] Law v. NCAA is the oft-referenced case that resulted in a successful antitrust challenge to an NCAA bylaw that set a salary cap for entry level coaches which had the function of limiting the number of coaches a Division I program could hire and forced the school to designate one of those coaches as a “restricted earnings coach,” who could not be paid in excess of $12,000 during the academic year and $4,000 during summer months.[6]
Although the bylaw in Law operated as a form of price fixing, in at least two respects the case is helpful for analyzing a show-cause order that operates as a group boycott or refusal to deal. First, to the extent it is claimed that show-cause orders only restrict employment with NCAA member institutions, the Law court rejected the NCAA’s argument that there was no anticompetitive effect on the market for coaching services because restricted earnings coaches could find coaching jobs in NCAA Division II, high school, and non-NCAA college teams.[7] Second, the court of appeals rejected the NCAA’s attempt to counter this clear anticompetitive effect by providing procompetitive justifications for the rule similar to those presented in Hennessey – that the rule “maintain[ed] competitive equity,” “retain[ed] entry-level coaching positions,” and protected NCAA member institutions from destructive cost increases. According to the Law court, the Hennessey court placed too much emphasis on the good intentions of the NCAA without requiring it to present concrete evidence showing how the bylaw actually helped to achieve those proffered objectives.[8]
The procompetitive justifications for show-cause orders are not at all clear. In Bassett v. NCAA,[9] the court of appeals did not require the NCAA to proffer any procompetitive justifications in response to a claim that a show-cause order violated Section 1. Instead, the court accepted the NCAA’s assertions that (1) the show-cause order was the result of the plaintiff’s own admitted misconduct and not a conspiracy to prevent him from coaching, (2) show-cause orders and sanctioning conduct do not constitute commercial activity because the rules enforced by the NCAA, in fact, punish the attempted commercialization of college athletes and intercollegiate athletics, and (3) show-cause orders do not produce anticompetitive effects on a discernible market. The court concluded that the plaintiff failed to allege that the employment ban resulted from some anticompetitive purpose, but rather the complaint alleged that the plaintiff’s injury, i.e. the ban, was the result of NCAA rules violations. Indeed, Bassett’s precedential weight is questionable. The case doesn’t even mention Law or Hennessey and it has since received negative treatment on the basis that amateurism rules are, in fact, commercial in nature.
In conclusion, the law should treat the show-cause order like an employment non-compete agreed upon by competing firms within an entire industry. Looking at the duration, geographical area, and line of business of show-cause orders, courts are likely to conclude that they violate state law governing employee non-compete agreements. And in the next federal antitrust lawsuit, the court is not likely to place too much emphasis on the good intentions of the NCAA without requiring it to present concrete evidence showing how the show-cause order actually helps to achieve the NCAA’s proffered procompetitive objectives.
[1] Mich. Comp. Laws Ann. § 445.774a (West).
[2] California’s Business and Professions Code provides that any contract which restrains one from engaging in a lawful profession is void. https://www.latimes.com/sports/sportsnow/la-sp-todd-mcnair-show-cause-20181009-story.html.
[3] Sherman Antitrust Act, 15 U.S.C. § 1 (2004).
[4] See Law v. Nat’l Collegiate Athletic Ass’n, 134 F.3d 1010, 1016 (10th Cir. 1998).
[5] Hennessey v. Nat’l Collegiate Athletic Ass’n, 564 F.2d 1136, 1148 (5th Cir. 1977).
[6] Citing a need to stop a “catastrophic cost spiral” in which NCAA member schools continued to increase spending on recruiting and coaches to compete with other schools, the NCAA formed a Cost Reduction Committee in 1989 which developed the “Restricted Earnings Coach Rule.”
[7] Law, 134 F.3d at 1020. The court reasoned that despite Division I coaching positions making up only a small portion of the overall coaching market, the NCAA’s lack of market power did not eliminate clear anticompetitive effects on the market for coaching services. Id.
[8] Because the NCAA failed to meet its burden of demonstrating legitimate procompetitive objectives, the Law court ruled in favor of the coaches on their antitrust claim, without inquiry into whether there were less restrictive means of achieving those objectives.
[9] Bassett v. Nat’l Collegiate Athletic Ass’n, 528 F.3d 426 (6th Cir. 2008).
